Ladies and gentlemen, welcome to the Lindab first quarter report 2018. Today, I am pleased to present CEO, Fredrik von Oelreich, and CFO, Kristian Ackeby. For the first part of this call, all participants will be in a listen-only mode, and afterwards, there will be a questions and answer session. Gentlemen, please go ahead.
Thank you. Good morning, welcome to the presentation of Lindab's results for the first quarter. My name is Fredrik von Oelreich, I will present the report together with our CFO, Kristian Ackeby. Our agenda today is that I will take you through the general overview, the highlights, and the outlook, Kristian will go through the numbers, and at the end, we open up for questions. Moving on to slide four, the first quarter was characterized by strong growth in all areas. Overall sales grow with 16%. The operating results increased to SEK 104 million, which should be compared to SEK 79 million last year. It's especially encouraging to see the significant improvement that we register in Building Systems.
Moreover, we generated a positive cash flow, and our net debt decreased with SEK 90 million in the quarter compared to last year. When it comes to the strategic assessment of our non-ventilation related businesses, we are progressing, and we are right now investigating the possibility to divest Building Systems. On the next slide, we can see how sales have developed across the regions. It's very satisfying to see good growth in all regions. In our biggest region, in the Nordics, we registered strong growth, both in Sweden and in Finland. The strongest growth we registered in Eastern Europe and former Soviet Union. We had double-digit growth in Building Systems in the important Russian market, but we also see very solid growth in the East European region, mainly driven by ventilation.
In Western Europe, we had a bit slower growth, still good growth generated in important markets like France and Germany. The product areas on slide six mirrors the geographical growth. All product areas are progressing, except rainwater and building products, which were affected by the cold and long winter in the north. It's also good to see that our smallest product area, fire and smoke, has started to grow again. With that, we move into the financials, and I hand over to Kristian.
Thank you, Fredrik. Moving to slide eight, group financial highlights. During the quarter, net sales increased with close to SEK 300 million or 16%, for which 13% organic. In fact, this is the highest organic growth in a single quarter since 2011. EBIT improved by 32% to SEK 104 million. Higher EBIT is mainly explained by higher volumes in both segments, which have been partly offset by reduced gross margin within Products & Solutions, and positively impacted by leverage on SG&A. Financial net has improved as a result of lower net debt and higher interest income. Tax rate did come in lower than last year, thanks to improved performance in a number of countries, creating less tax losses, contributing to an improvement of 10% on earnings per share.
If we adjust for one-off items, the improvement for higher adjusted EBIT, together with improved financial net and tax rate, the adjusted EPS would increase with more than 70%. Turning to next page. Product Solutions, strong sales development. Organic sales increased with 8%, and net sales amounts to SEK 1.9 billion. Continued positive sales development in all regions, especially strong in CEE and CIS, and in the North. We had the highest recorded sales in the first quarter ever for Sweden. EBIT amounted to SEK 180 million, positively impacted by the higher sales. It was largely offset by lower gross margin. The lower gross margin is attributable to two main reasons: unfavorable product mix and higher raw material prices. The product mix is estimated to have had a negative impact on gross margin with 0.7 percentage points.
Largest contributors to the negative impact is explained by much larger share of the more product-based Building Solutions, combined with lower share of Rainline due to the weather conditions. Prices at the end of the period are higher than the end of last quarter. Additional price increases are scheduled for Q2. Currency had no impact on EBIT. Positive impact from translation is offset by negative from transactions. For example, that we buy steel for our steel service center in Sweden, but are priced in Europe. Moving to next slide. Building Systems. Strong sales development. Growth for the quarter was 56%, and there was a favorable currency effect of 1%, positively impacted by Europe and negatively from the ruble. The EBIT improvement versus last year is mainly explained by the larger volume increase, also improved gross margin.
Currency had a smaller negative impact on EBIT in the first quarter due to stronger euro, where we make losses, offset by weaker Russian ruble, where we make profits in the quarter. Backlog at the end of the period was higher than the same period prior year, though the part of the backlog that has increased compared to a year ago is scheduled for the second half of the year. Moving to the next slide. Cash flow. Adjusted free cash flow increased 92 million to a positive 21 million SEK, positively impacted by the change in working capital. During the quarter, net debt has increased sequentially with SEK 60 million, which is mainly related to currency impact. Net debt to EBITDA ratio stable and improved to 2.1 from 2.4 last year. This concludes the financials, giving the word back to you, Fredrik.
Thank you, Kristian. On the next slide, we pinpoint a few highlights from the quarter. In Building Systems, sales are developing favorably, and the backlog is higher than last year. It's worth noting that we took seven order with a value of over 10 million SEK each. In our biggest market, Sweden, we had all-time high sales, and that was very much driven by important building projects, building project sales. In Finland, we see good growth. We are successful in selling our ICS systems and also the new UltraLink, which we presented in a previous quarterly report. In Eastern Europe, where we registered the highest growth, within Products & Solutions, we have several markets that have actually double-digit growth in the quarter.
One we pinpoint here, which is Romania, which have been very successful with several projects during the quarter. We move over to the next slide, in March, we participated in one of Europe's most important trade shows for HVAC products, was in Italy, in Milano. Here, Lindab showed a full ventilation system from air handling units to diffusers, including our new UltraLink with a new Bluetooth feature. This was very well received, step by step, we are building up our credibility as a solutions provider within ventilation. Moving to the next slide, when we start to offer complete solutions, we can also start to improve approach end customers. We are going from selling products to installers to being prescribed by architects, consultants, and real estate owners.
We already have quite some success in the marine sector, which is one of the target customer segments that we approach. Step by step, we are approaching these important end user segments, and we can say that this is a transformation in our strategy, going from a push strategy, pushing product, to a push and pull, where the Lindab brand starts to be prescribed by important end customer groups. If we move forward in the presentation, to the outlook, starting with the marketing, with the market development, we can see continued market growth, although it's a bit slower than last year. Euroconstruct has a forecast of a growth of 2.3%, and last year we were close to 4%.
The growth is particularly strong in the whole CEE, Eastern Europe region. We could also mention that we see some signs of softness in the Nordics, namely in Norway and Sweden, this is mainly in the residential area, where Lindab has quite low exposure. Roughly, our sales go 20% to the residential segment and 80% to the non-residential segment. It's also important to note that steel prices are moving upwards again, we could see increases in the range of 3%-5% during quarter two. If we move over to the summary, to sum up, all in all, we had a very good start of the year, with a strong top line and an EBIT improving with SEK 25 million.
To end up, as we have discussed before in the quarterly reports, we focus on five areas. We have to manage the increasing steel prices in order to protect our margin. That work is going on continuously. We are executing on the turnaround plan in Building Systems, and we are following that plan that we presented in the last quarter. We are addressing, step by step, the low performing units that we have in Products & Solutions, and we are building a foundation for organic growth by investing in our energy and climate solutions. last but not least, we are going through the process of focusing on our core business, being ventilation and indoor climate. With that, I say thank you, and we open up for questions.
Thank you. Ladies and gentlemen, if you wish to ask a question, please dial zero one on your telephone keypad. We have a question from Max Frydén from Danske Bank. Please go ahead.
Yes, hi, good morning. Max Frydén from Danske. I have a couple of questions. The first one is on the price increases, which you mentioned here, and it's not yet sort of offsetting the increasing input cost. Maybe you can just help us understand, where are you in the process of catching up to the market compared to where you were, let's say, at the start of the year? Should we expect continued negative effect in Q2, or should we start to see a cost neutral effect from the price increases?
Yes, we have importantly increased the prices in the first quarter. As we can see, that is not enough to make up for the loss in gross margin. However, as Kristian mentioned, that is also affected by a worse mix in the first quarter. We have also price increases coming in quarter two, our expectation is that that should help us moving in the right direction. Of course, we then have to lift a finger for that. We see the steel prices are also starting to move up again. However, there will be a certain delay before that will affect our COGS.
All in all, that means that we should be progressing in quarter two, and then we have to have a readiness for possible additional price increases, depending on the move of the stock prices.
That's very clear. For the Products & Solutions division, is it possible to quantify the volume growth, out of the 8% organic growth?
Of the 8% organic growth, slightly more than half is volume, and you should expect 3%-4% people.
Perfect. Finally, from my part on the Building Systems, the the positive or at least not negative result in a quarter that is normally seasonally weak, right? You have the strong order book, that you mentioned with the 7x SEK 10 million orders, the higher backlog and increased gross margin. I presume then you have a high profitability in the backlog, with high gross margin, and then the effect from savings program. Is it realistic to see that you should have positive results here, with this capacity utilization throughout the year, or am I missing something?
I think we do not guide on a full year number here, but what you should expect and what we also included in the quarterly report is that for the second quarter, we do not expect to see a significant volume increase. To start by the volume and production planning of the program, I will leave it to Fredrik.
Yeah, as Kristian mentioned, there will be more impact volume-wise in the second half of the year. When it comes to the cost reduction program, as I mentioned, we are following plan, but that will gradually start to impact. As we said, this is a program going over two years with the ambition to reach a total full impact of SEK 50 million effect on the bottom line. The majority of that is coming in next year. When it comes to this year, what will affect is mainly coming in the second half of the year.
Okay. Yeah, thank you for answering my questions. Thank you.
Thank you.
Thank you.
We have a next question from Douglas Lindahl from Kepler Cheuvreux. Please go ahead.
Hello, Fredrik and Kristian. A few questions from my side. first of all, the one-off in Q1 here, SEK -33 million, is that, I mean, looking at the full year, it seems to be quite a somewhat high number. How should we look at this number going forward throughout the year?
We do not give a guidance on the OTC number, specifically based on these 33. To start off with, these 33, you have one part related to the strategic assessment and one part related to Building Systems and this turnaround program. We have said, in last quarterly report, we communicated that we expect the program in Building Systems to have a positive impact on EBIT of around SEK 60 million and to have a payback of approximately two years. That gives you that one. Also, like Fredrik earlier stated, that it will be performed during a two year time.
Okay. Nothing's changed basically on your cost expectations for from the cost cutting program?
No.
No. Okay. Just a second question here, with regards to your replacement, have there been any change there or, I guess this question for Fredrik, maybe.
When it comes to, finding a replacement, for CFO, that was your question?
Yeah, exactly. Exactly.
Yeah, we are moving forward on that, and, we are in the end phase of that process. Of course, it all depends on notice periods and so on, when a person can actually start. We are in the final stage of appointing a new CFO.
Okay. That's all for me. Thank you.
Thank you.
Thank you.
Our next question is from Predrag Savinović, Nordea. Please go ahead.
Yeah, thank you very much. Maybe I missed this part, but you said in ruble terms, the profitability in Building Systems is positive this quarter. Could you say what margin it is at right now or in Q1? Maybe, seeing the order moment is very strong, does this perhaps change your, I mean, the price tag or the expectancy, what you can gain from a sale of this asset also?
Yeah. I will start with the first one with margins, I will leave the second one for Fredrik here. The 1st one, referring to margins, I will not comment on margin by specific country or currency, but just to highlight here that we are, like I said earlier, profitable in Russian ruble. What you also will see when we look into the second quarter, it will be more, more, how should I say? The capacity utilization will equal out somewhat. In Q1, we have a larger part in Russia than we will have in the second quarter, then the portion for Russia will increase again in Q3 and Q4, based on our production planning.
I'm not sure if that gives you the total answer, but I will leave that for now and see if you have any additional question on that one, I'll leave it to Fredrik.
Yeah, your question was what to expect in terms of if we would divest the Building Systems? I mean, we clearly cannot comment on that in detail, but I think it is important to state that the main driver for the company and the board to go in this direction is to focus on the core, to have a clear group structure and focus on the core. That's the main driver, the strategic driver. Of course, we have to realize that we are potentially selling an asset which is making a loss today. That have, of course, been taking into the picture. We have to realize that.
It is very good to see that it's moving in the right direction for Building Systems. That's strengthening Lindab, and that is also, of course, making the potential divestment more attractive. What is important for us also is that as long as we are an owner of a company, we professionally manage it, and we execute the program of making a business profitably, sustainably over the longer term, as long as we are the owner of the asset.
Are we looking at any winter effects here? I mean, as in, is the underlying sales momentum even stronger than the figures you post here in Q1? Also, a comment on the market growth or the outlook slowing, as you mentioned in your Euroconstruct, et cetera. Is that not a bit contradictory, considering, I mean, the very solid growth you post here today. Is it relevant even to have that kind of forecast in mind, or how should we view it?
I think the quarter one very strong growth shows that the company is doing very well, and we are in a strong flow. I would say that we are taking market shares in several markets. We are growing faster than the market in average. Of course, Euroconstruct is an average growth. The growth in East Europe is very much stronger, in general, Lindab has solid growth in all the regions. When it comes to the market, overall, the construction market is slowing down a bit. As I mentioned, the signs we have seen so far is more related to countries and it is more related to residential, where we are less exposed.
You know, so far, so good, and, you know, we have a good activity level in the company, in the various regions.
All right. On the winter effect, is there any in your pipes today?
Yeah, I mean, again, that you can say, it displays that we are doing well. You know, despite the winter effect and also the Easter effect, we have strong growth. Having said that, of course, we do see slightly negative growth in the Rainline products and in the building products, which were affected in the Nordics, which is the most important market for those products, huh. There are clearly, you know, the tinsmiths were not able to go outside the house. They were more busy with shoveling snow than constructing houses in the quarter one.
On these new solutions and concepts you are presenting, what is the end game here? What are your expectations? I'm assuming it's going to be helpful for the margin. When will this kick in? What kind of implications are we looking at? What kind of time frame to expect?
Yeah, I mean, this is of course, difficult to guide on, and the question is whether we guide on it. This is the-- I mean, this is a long-term strategy. It is step by step. It's not replacing our product sales, it is complementing our product sales. You know, it will sort of kick in step by step. We are right now at a very, you know, early stage, but we are working in with the platform thinking.
Our ambition is that the first platform when the products connect together, when they can be built together, that stage should be ready by the end of this year, so we can actually connect them and propose the system. We're also working on platform number two, where also these sort of systems for specific then customer segments also can communicate. There will be communication possibilities in the system that we propose to our customer segments. We will see how the market receives those solutions, of course. It's step by step, building the system, using the digital possibilities to make them communicate, and then addressing segment by segment.
I mean, we have identified eight customer segments, so we don't go out to the full customer group in, in one go. We take it step by step.
Okay. A follow-up on, you know, the price increases that you're doing right now. I mean, could you just walk us through maybe the coming quarters, assuming constant input prices and what to expect in, on the gross margin, all else equal, for just some kind of guidance to see us as in? Since we're always kind of missed expectations on how much this actually impacts you in the quarters, some flavor would be helpful.
Yeah, I mean, we don't give more clear guidance than what I said in the previous question that was asked. I mean, there are different, you know, price windows in different markets. You know, some increase in first of January, first of February, other, like, U.K. and Ireland, they end up in quarter two. There are different price windows in different markets, and this is sort of the effect that we see when price increases kick in different quarters.
As I said, you know, our belief is that Q2 should take us in the right direction, but it will not cover up for the full margin differences compared to last year that we had.
Okay. That is all for me. Thank you very much.
Thank you.
Thank you. We now have Johan Dahl from SEB . Please go ahead.
Yes. Hi there. Could you just clarify what the implications of that the strategic assessment is entering a new phase? I'm not exactly sure what message you want to send there. Alternatively, can you just explain, you know, the outcome of the first phase of this assessment? We know you want to focus on ventilation, but if you could be clear there, please.
Yeah, as we said from the start, we are evaluating businesses that roughly represent 30% of the group turnover. When we say that we are entering a new phase now, is that actually when it comes to Building Systems, we have prepared that business area for a potential sale with all what that involves. Kristian also mentioned some of the costs we have taken for this strategic assessment, and that is of course relating to, you know, preparing a potential sale and making the custom due diligence processes and so forth. In that sense, we have entered a new phase, and we are looking at the possibility now more concretely to divest Building Systems.
That, of course, representing, roughly one third of the total businesses that are being assessed.
Yeah. Will you report this as a held for sale shortly, or the Building Systems?
By you doing the evaluation, it's not been held for sale. You have decided to sell, then it's at the 10%.
All right. finally, the cost out measures taking Building Systems so far, what exactly are those activities and how much savings does that account for, I mean, decisions taken up till the end of Q1?
I mean, the main initiatives so far is relating to account reduction, and then we are also in the phase of preparation when it comes to moving production from west to the east, meaning from Luxembourg to our site in the Czech Republic, yeah. Those are the initial steps taken. When it comes to the impact, I think we commented upon that before, that in the second half, where we start to see impact of the cost savings, and the full impact will come next year.
Yes, so the decisions taken represent quite a significant share of, you know, the target at 50?
I think to clarify, this is a two year program. We have in the quarterly report, you could read that SEK 10 million has been taken so far, and that is mainly related to severance. If you look into headcount for Building Systems, you will see that headcount is relatively flat in total, but that under next level, so to say, headcount has decreased in Western Europe and increased in Eastern Europe.
Okay, thanks.
Thank you.
Thank you. Our next question is from Kenneth Toll from Carnegie. Please go ahead.
Two questions. Now that you have, sort of separated the Building Systems division more, could you say anything about the potential negative synergies in divesting it?
Yeah, I mean, we can say like this, that there are very limited synergies between Building Systems and the rest of Lindab.
Okay. Also, now we have discussed Building Systems a lot, and the way I personally interpret this is that you have interest for that division. Can you say something about the interest for the remaining two-thirds of the businesses that you are sort of looking to divest? Are there interests for those?
I think there are interests for all these activities. I mean, in particular, the other parts we look at because they are profitable. As we discussed before, Building Systems come from a loss-making position. Also, as we said, we are most advanced when it comes to the Building Systems, which is also the part of the business which has the least links to Lindab as a whole.
Mm-hmm.
That is more of a clear cut.
Yeah.
The other parts, we are still in the process of assessing exactly what is the optimal structure for the Lindab group.
Yeah. you haven't sort of carved those out yet from the Lindab group?
No, there is no such carve-out that has been executed yet.
Yeah. Okay, thank you.
Mm-hmm. Okay, thank you. We have no other questions for the moment.
Very good. I think that then we conclude here, and, we say thank you very much.
Thank you, gentlemen. Ladies and gentlemen, this concludes today's conference. Thank you all for your participation. You may disconnect.